6 common mistakes in real-estate contracts

For many people, a real-estate deal will be the biggest transaction they do that year—or ever. So, whether you’re buying a first home, converting hard-earned savings into land or selling property that you inherited from family, it’s important that the contracts surrounding the transaction are as good as the deal is important.

The first step in making sure that your real-estate contracts prevent headaches rather than create them is to hire an attorney. But don’t just hire any attorney. They’re not all the same. Some do many land transactions while others just dabble in real estate while focusing on other areas of law. So ask your attorney some questions and find out how familiar they are with real-estate transactions.
Once you’ve found the right help, here are six common issues to watch out for.

1. Missing effective date
The effective date is the date when the contract goes live. It’s the date when responsibilities start and timelines begin. In other words, it’s an important date. And yet I routinely see contracts without an effective date or where some but not all of the parties dated their signature.

Why does that happen? It depends. Sometimes people forget. Sometimes the signature block does not include a conspicuous spot for a date. But most often people just leave it blank. For example, many contracts lead with the effective date in the very first sentence. Usually it will say something like “This Agreement is dated—November 2020, and is between X and Y.” It’s written that way because whoever drafted the contract knew roughly when the contract would be signed and expected the signers to fill in the missing information once the exact date was set. Help the drafter out by filling in the date.

2. Forgetting parties
Contracts only bind the people who sign them. And CNMI land often has many partial owners. For example, there can be dozens of owners if the property never went through probate following the death of the person listed on the deed. If the contract misses one of these people, then bad things tend to happen. For example, if the unnamed party discovers the deal before it closes, then expect heated negotiations between the unnamed party (who is now upset and has the opportunity to spike the deal) and everyone else. Meanwhile, if the omitted party emerges after the deal closes, then litigation becomes likely. At that point, either the buyer (or lessee) sues because they didn’t receive what they bargained for or the unnamed party sues because everyone else got paid except for them.

3. Not including spousal consents
A variation on forgotten parties is the failure to include a spousal consent. Real-estate contracts involving a married seller (or lessor) should always have a spousal consent in which the spouse consents to the sale (or lease). That’s true even if the spouse has absolutely no interest in the property.

Why? To give the buyer (or lessee) peace of mind. With a spousal consent, the buyer (or lessee) knows that the transaction is safe no matter what happens to the seller (or lessor’s) marriage. But without a spousal consent, the buyer (or lessee) will always have to wonder if they may get dragged into divorce proceedings months or years later via claims that the transferring spouse improperly gave away the non-transferring spouse’s share of the property.

4. Incorrect or incomplete party names
Identifying all of the parties is a must. But we also need to do it right. That means using legal names, not nicknames. For example, Tiger Woods’ legal name is Eldrick Woods. So, he should sign contracts as Eldrick Woods or Eldrick “Tiger” Woods, not as Tiger Woods.

Similarly, if you (like many people in the CNMI) have a common family name, then you should include your middle initial or, ideally, your entire middle name when signing contracts. For instance, as of 2013 the U.S. had more than 25,000 people named John Smith. Each of them should include their middle names to avoid confusion.

And, of course, whether we use full names or not, we run into problems if the contract misspells someone’s name. Fortunately, that normally can be fixed quickly by drafting an amendment flagging the typo and updating the spelling. But it can cause some heartburn if lenders or insurance companies are involved. So, it’s best to double check before signing.

5. No contact information
Contact information may seem unimportant when a deal goes smoothly. But when problems arise, and you need to give the other side an official notice. Assuming that a phone call or Facebook message will suffice is asking for trouble. Instead, the contract should spell out exactly what an official notice must look like. Historically, the preferred form of notice has been a letter addressed to a particular person at a specific address. But these days more and more contracts require emails sent to a specified email address.

6. Incomplete legal description
When transferring property, it feels easier to just write the lot number. For instance, Lot No. 012 A 345. But the contract should use the full legal description whenever possible. In other words, it should look something like this: Lot No. 012 A 345, Village, containing 1234 square meters, more or less, as more particularly described in Cadastral Plat No. 012 A 00, the original of which was recorded 03 November 2020 under File No. 20-0011 at the Commonwealth Recorder’s Office.

At the same time, while it’s essential that contracts formally transferring property should use the full legal description, preliminary contracts (such as the offer) don’t necessarily need to do so. But they still need to be reasonably specific. For example, what happens if the preliminary contract lists the lot number but not the lot size and then it turns out that the property is smaller than the buyer expected? If the seller is reasonable, the price drops or the deal ends. But if the seller is not so reasonable, then expect a battle.

This column is for informational purposes only and is not intended to be taken as legal advice. For your specific case, consult a lawyer.